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Markel Tax

23 Jul 2020

Principal Private Residence Relief

Many home owners looking to move have put on hold or postponed decisions due to the current Covid-19 pandemic. As things begin to settle down, individuals will be in a position to continue with sales so it is important to be aware of recent changes to the capital gains tax relief available to them.

Principal private residence relief (“PPR relief”) is available to eliminate or reduce the gain arising when an individual makes a disposal of their only or main residence. Two major changes to PPR relief took place from 6 April 2020 as follows:

Final period of ownership

The first major change is a reduction of the final exemption period from 18 months to nine months, except for those property owners with a disability or resident in a care home who will remain entitled to a final exemption period of 36 months. 

This change is most likely to impact those individuals who no longer live in the old main residence but are unable to or have difficulty in selling the property within the final period of nine months. Those individuals could have an unwelcome chargeable gain.

Individuals who were planning to sell within their final nine to 18 months of ownership prior to 6 April 2020 but who had to delay due to Covid-19 will be among those caught. Despite the difficulty individuals have faced with selling homes during Covid-19, no concessions have been announced concerning the extension of the final period, in contrast to SDLT where a longer 36-month period is allowed between disposal of main residences, and where HMRC have announced that this period will be extended by concession due to the impact of Covid-19.

Relief for letting the PPR

Prior to 6 April 2020 letting relief applied where an individual let their only or main residence as residential accommodation for part of their period of ownership. On disposal, the individual was entitled to letting relief, in addition to the PPR relief otherwise available, at the lower of:

  • the amount of PPR relief otherwise available

  • the chargeable gain arising from the letting and

  • £40,000

There was no requirement for the individual to occupy the dwelling while let. However, for disposals on or after 6 April 2020, letting relief will only be available for the periods in which the individual has had shared occupancy with their tenants.

Individuals who were planning on letting relief being available for a disposal prior to 6 April 2020 but have had to delay due to Covid-19 will be among those caught by this change. Despite the difficulty individuals have faced with selling homes during Covid-19, no concessions have been announced concerning the cliff edge withdrawal of letting relief for disposals post 5 April 2020.  

Reporting requirements

Reporting changes not only affect whether any capital gains tax will be due, they also impact on reporting deadlines. Since 6 April 2020 any disposal of a UK residential property that is not wholly covered by an exemption or relief, so for example a disposal of a PPR where the PPR relief is not 100% of the gain, must be reported to HMRC within 30 days of the disposal and a payment made on account of the tax liability. This is the case even if the residual gain is small and will result in minimal tax liability.

It is therefore important that individuals disposing of their PPR know when the gain will qualify for 100% PPR relief and when an amount will remain chargeable to capital gains tax.

Calculation of PPR relief

The amount of PPR relief deductible before any letting relief is calculated by multiplying the gain by the period of occupation over the total period of ownership.

The individuals’ period of occupation can be actual or deemed occupation. Deemed occupation are periods during which the individual is physically absent from the property, but for PPR relief purposes, is treated as living there. In addition to the final period of ownership set out above, other examples of deemed occupation periods include:

Delay in taking up residence

The Finance Bill is introducing changes to this concessionary relief. From 6 April 2020, where an individual has purchased a property but is unable to move in immediately due to the completion of construction/alterations/decorations or a delay in selling their previous main residence, provided this period does not exceed 24 months and the individual moves in immediately after, this would qualify as a period of deemed occupation.

Prior to 6 April 2020 the concession only applied to a 12-month period, or where the period exceeded 12 months due to reasons outside of the individuals control, the period may have been extended to two years.

Given the reduction in the final period from 18 months to nine months it is now beneficial to remain in an existing main residence until sale rather than moving to the new property as this extends the overlap period in which two properties are owned and full PPR relief is available from nine months to 24 months.

The next examples of periods of absence must be preceded and followed by a period of actual, physical occupation to qualify as deemed occupation.

Abroad by reason of employment

If an individual has been absent from the residence to perform duties of employment overseas, this period will be deemed occupation. There is no time restriction on this.

Reason of employment

If an individual has been absent from the residence due to a condition imposed by their employer, which required them to reside elsewhere, this period would also be a deemed occupation. This period, however, is restricted to four years. Anything in excess of four years would not be deemed occupation.

Any period of absence

Any period of absence which does not exceed three years, will also be a period of deemed occupation.

These periods of deemed occupation are illustrated below:

Phil bought a property in June 1996 and sold it 24 years later in June 2020. From June 1996 to June 1997, he lived in the property as his main residence. In June 1997, Phil was asked to relocate to Manchester by reason of employment. His secondment finished in June 2002, and he returned to live in his property until June 2005. In June 2005 he was sent by his employer to work in Germany. He returned from Germany and resumed occupation of the property in June 2015 until the house was sold in in June 2020.

Phil’s period of ownership would be 24 years.

The period between June 1996 and June 1997 would be one year of actual occupation.

As Phil had occupied the property before and after his secondment to Manchester, the five-year period of absence between June 1997 and June 2002, may qualify as a period of deemed occupation. Four years of this secondment will be covered by the “reason of employment” and the remaining year by the “any period of absence”.

The period between June 2002 and June 2005 would be three years of actual occupation.

Again, as Phil had occupied the property before and after his secondment to Germany, the 10-year period of absence between June 2005 and June 2015, would qualify as a period of deemed occupation as it is covered by the “abroad by reason of employment”.

The period between June 2015 and June 2020 would be five years of actual occupation.

In this example, the whole 24 years of ownership would therefore qualify as periods of occupation. As a result, the whole gain would qualify for PPR relief, reducing the gain to nil.

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Tagged Property tax & SDLT COVID-19
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